Reserve Bank of India (RBI) deputy governor M Rajeshwar Rao on Friday said public sector banks need to given the same managerial and operational flexibility to drive growth.
“… the same level of convergence would have to be extended to managerial and operational flexibility of PSBs based on certain governance standards,” Rao said while delivering the 12th R K Talwar memorial lecture, assessing the policy choices in the Indian financial system. “Going forward, this will generate the requisite space for both PSBs as well as private banks to grow their business and thrive,” he said.
From a regulatory standpoint, Rao said there is a convergence between public and private sector banks. “Therefore, from prudential perspective, the debate is infructuous,” he said.
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Rao also said that the 2017 consolidation exercise of the government, reducing the number of public sector banks from 27 to 12, did not have any negative impact on the financial inclusion goals of the banks as the merger did not significantly change the number of branches. In addition, the financial inclusion goals are now driven by banking correspondent model and technology, he said.
While private sector banks maintained their soundness during the bad loans crisis which started in 2013-14, they also perform better in terms of governance standards and risk management, according to a research paper released on the RBI website in August. While the consolidation of public sector banks was a step in the right direction, the government should take a more gradual approach in privatising public sector banks and not take a “big bang approach”, the researchers at the RBI had said in an article in its monthly bulletin for August.
In the digital banking space, small finance banks have played a progressive role in mobilising savings and providing credit to their niche customer segments, furthering the cause of financial inclusion, Rao said. Although small finance banks do not compare with the traditional banks on scale, they own and operate 4% of bank branch network in India as of now, compared to less than 1% in 2018. Similarly, the impact of payment banks on digital payment economy and doorstep banking cannot be assessed just by their points of presence but also from the data of facilitated digital transactions, he said.
“The primary objective of a differentiated banking structure, as alluded earlier, was to expand the reach of financial services and institutions with financial inclusion being the overarching objective,” Rao said.
Rao also said that the establishment of 75 digital banking units is a step in the right direction, which will fasten the financial inclusion process. The scope of financial inclusion in India is huge, which can accommodate various models of banking to grow, he said.
While adopting technology, the approach should be gradual so as not to destabilise the financial system, as the latter is the overriding function of regulators, he said adding that the nature of partnership between traditional banks and the new fintech players should be symbiotic. The recent guideline on digital lending is an attempt to have an enabling framework, balancing competing considerations, he said.